Global Economy: Here Cometh Deflation

By Michael Lombardi, MBA Published : August 14, 2015

Early this year, I started writing about how falling copper prices were a leading indicator of trouble in the global economy. Since then, we’ve all come to know about the economic slowdown in China. But the further collapse in copper prices over the past three months could be warning of something much bigger than just a slowdown ahead.

Commodities Price Plunge Suggests There’s No Growth

Below is a chart of the spot price of copper. Notice how copper prices have fallen 20% since the beginning of May 2015.

Copper prices now trade at their lowest level since (you guessed it) 2009.

Other commodities, in specific basic materials, have seen their prices plunge as well. Crude oil, aluminum, lead, nickel, and zinc—they are all down. Even commodities like lumber, sugar, and coffee have been seeing a decline in price. This is very worrisome for the global economy because lower commodity prices suggest demand is weak. And when demand is weak, we are in an economic slowdown.

Major Economic Hubs Struggling

The International Monetary Fund (IMF) doesn’t expect any of the major economies like the U.S., Germany, France, Italy, Japan, United Kingdom, and Canada to grow more than three percent in 2015. (Source: International Monetary Fund, last accessed August 7, 2015.). I have news for the IMF; many of these countries won’t even get two percent growth.

And let’s not forget China. In 2015, the second-biggest economy in the world is expected to grow by only 6.8%, and then slow to 6.3% growth in 2016. This is an embarrassing growth rate when looking at China’s past economic performance. China’s recent devaluation of its yuan is just one of the moves the country will take to get its economy growing.

The yuan’s devaluation hurts us. It makes our currency more expensive and it exports deflation to America—a huge problem.

As Goes the Global Economy, So Goes Corporate Earnings

Given what’s happening in the global economy, the mainstream is still far too optimistic on the stock market.

The hard fact is that a quickly slowing global economy is an issue for American companies as their corporate earnings decline. According to S&P Dow Jones Indices; in 2014, close to 50% of all sales from S&P 500 companies were derived from outside of the U.S. (Source: S&P Dow Jones Indices, last accessed August 7,2015.) Hence, American companies are fighting the negatives forces of both a strong U.S. dollar and a slowing global economy. Stock markets simply don’t rise on that backdrop.